Around 5 years ago, house builders decided that they would create a monster, with many left counting the cost of buying houses which are leasehold and not freehold. This practice was born out of the property sector, where large apartment blocks follow a leasehold model. This is not an issue in these buildings that house multiple properties as the division of the freehold is difficult, and as such, most apartment blocks and the like come with leaseholds, typically around 125 years out to 999 years. But in houses it made no sense! So why do it? The obvious answer is to make more money from the build! They didn’t stop there either, as at the same time they also started to tamper with the larger apartment blocks putting in place a system that led to a huge distortion in ground rental figures.
In normal circumstances, the ground rent (a charge levied by the owner of the freehold) is a minimal sum per annum. This sum is reviewed typically every 5 years and is linked to RPI. This is collectively accepted as a fair and effective way of managing the levy. However, developers decided that they could make more from their investment and besieged the new build sector with a system that would sell freeholds on with short term ground rent reviews that were not linked to RPI, instead subject to rapid increases, and in many cases with costs that tripled within the first 15-20 years. Although the scandal around multiplying these numbers over short periods has now in most cases disappeared there are still those caught up in these contracts, which up until now have been unable to trapped and unable to do anything about them.
At the same time as already mentioned they decided to do this in the house building sector too. At the beginning of 2019, a committee was set up to explore the minefield of leaseholds and see what recommendations they would make to make the system fair for all, The Housing, Communities and Local Government Committee (HCLGC) was established. This has recently published it’s findings and has offered several recommendations to Government to address the issues identified.
These are as follows;
It called for a standardised key features document that could be given to buyers from the outset, allowing them full visibility, and at the same time proposing a cap of 0.1% of the properties value, to be capped at £250 pa. It also suggested that the government could introduce legislation to counter and remove onerous leases to existing leases. In the most extreme cases it suggested that the developers could be liable to fines, and have to reimburse buyers should the leases be deemed anti-competitive.
The report went on to discuss the sector as a whole and reported on the role of Solicitors, developers and agents. In the findings it noted the following;
“At the start of our inquiry, we were particularly keen to explore the growing concerns relating to houses being sold on a leasehold basis, which we believe is an inappropriate tenure for houses and should cease,” the committee said. “However, as our inquiry progressed, it became apparent that many of these issues were also faced by leaseholders in flats, and our recommendations reflect this. “Too often, leaseholders—particularly in new-build properties—have been treated by developers, freeholders and managing agents, not as homeowners or customers, but as a source of steady profit. “The balance of power in existing leases, legislation and public policy is too heavily weighted against leaseholders, and this must change. Our report sets out recommendations for how this might happen,” it added.
The Committee was particularly concerned with developers who often provided misleading sales information, often suggesting that the leases could be purchased in a few years time at little cost, when in fact this was not true as they had been sold on commercially and the price had soared. What they did also note, and where they thought there could be legal recourse, was where the solicitors, who were often thrust upon clients, had failed to spot or warn their clients, and to that end were legally responsible and could suffer the consequences.
The key recommendations from the report are outlined below:
• The Competition and Markets Authority should investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation
Developers denied that their sales teams deliberately misled leaseholders with partial sales information and false promises of purchasing their freeholds at an agreed price. But the number of near-identical stories from leaseholders reflects a serious cross-market failure of oversight of sales practices.
• The Government should prohibit the offering of financial incentives to persuade a customer to use a particular solicitor
Consumers must be able to access independent and reliable legal advice when purchasing a property. Their interests cannot be served where they are coerced into using developer-recommended conveyancing solicitors, who rely on repeat business from developers.
• Our view is that existing ground rents should be limited to 0.1% of the present value of a property, up to a maximum of £250 per year. They should not increase above £250 over time, by Retail Prices Index or any other mechanism
• The Competition and Markets Authority should indicate its view as to whether onerous leasehold terms constitute ‘unfair terms’ and would be, therefore, unenforceable
Were the CMA to determine that onerous terms in existing leases are indeed unfair, or that they were mis-sold, the Government should take further action. Where it is determined that leaseholders have paid unreasonable permission fees or ground rents over the course of their leases so far, they should have those refunded by freeholders with interest.
• We note that it would be legally possible for the government to introduce legislation to remove onerous ground rents in existing leases
While it would be difficult to change the terms of existing leases, it would not be impossible. Legislation could be made compliant with human rights law. Freeholders would probably need to be compensated, but that does not necessarily need to be at full value.
For us and many, this investigation is long overdue, and if it had gone unchecked for too much longer would have created chaos. This is a timely response to what was becoming a vast scandal, for which we were all suffering, and a swift introduction of the legislation and a penalty system to both stop and in many cases compensate existing buyers will no doubt go a long way to stopping this practice, which from anecdotal evidence we are already witnessing.